The SII, whose second charitable objective is to promote integrity in the industry, has been, for some time, concerned that inappropriate remuneration structures have affected behaviour of individuals and contributed towards to the current financial problems.
This policy is applicable in a global context and is intended to be applied to those who receive a bonus which exceeds the level of twice the average earnings for the country in which they are based and whose bonus is more than 50% of their pensionable salary, regardless of their position within the firm.
The SII paper complements many of the aspects in the letter sent by the FSA’s CEO, Hector Sants (13 Oct 08) but also makes two distinct suggestions; advocating much greater bonus payment transparency in annual reports (principle 10) recognising individuals achievements which may not always result in additional income accruing to the firm (principle 2).
The SII Core Principles on remuneration in the financial services sector are:
The SII recognises and supports the concept of paying people an element of remuneration in recognition of achievements in their employment that are over and above what would normally be expected, and/or as a legitimate share in the profits of the organisation or parts of the organisation.
These achievements may not always result in additional income accruing to the firm.
In many cases it could and should be because the individual’s actions have saved money, provided a valuable support service or prevented a loss.
A bonus should take into account not only the contribution of an individual but also that of their team/division and the overall performance of the firm/company.
Payment based solely on an employee’s individual profit needs exceptional justification because of the possible incentive that it gives to an individual to put their interests before that of other stakeholders.
A bonus should also take into account factors other than profit, such as co-operation with others, compliance with procedures and training of others.
A bonus should reflect the risk involved and firm’s capital used in acquiring any additional profit or higher than anticipated level of performance.
For example, an individual who built up a few highly leveraged or complex positions, trades or deals that worked in their favour, may be deemed to be riskier than someone who made the same contribution from smaller, but more frequent or matched, positions, trades or deals.
Payment of a bonus (depending on the type of transaction) should not be front loaded and should be spread over a period relevant to the transaction e.g. between two to five year.
This is to allow time for the results of the underlying transactions upon which the award was made, to be properly evaluated.
Bonus awards should be indicative, not final and vest in yearly tranches.
The vesting is not intended to restrict mobility, and need not be tied to whether the employee remains with the firm. The intention is to allow the possibility of clawing back, part or all of the bonus award should it emerge at a later stage that the underlying transaction was not as profitable as first thought. Similarly, the reverse could apply
In the case of a quoted company, or where phantom shares are used for deferred remuneration, then generally, the higher the bonus award, the greater the proportion which should be paid in shares.
This ensures that the objectives of the individual are aligned with the shareholders and encourages a long term approach.
The larger an award compared with an employee’s basic salary (for example if it is greater than twice their salary) the greater the need for it to be signed off by an independent body within the firm, such as the remuneration committee or non executive directors.
This is to reduce the temptation by individuals of obtaining a life changing amount of money by taking a short term course of action..
The annual report and accounts of firms should, in future, provide a level of disclosure above the statutory minimum on bonus payments and break down details of these payments into the salary and bonus elements in the standard bands of £5,000. <.p>
SII Chief Executive, Simon Culhane FSI, said “We have been concerned that excessive greed has played a part in the Industry’s financial problems. We need to move away from a casino mentality and ensure that all the long term stakeholders are treated fairly. We strongly support the concept of paying people a bonus for achievement over and above what is expected, but it needs to be more transparent and reflect the longer term value that the individual adds to the business.”